Core vs non-core: India Inc’s diversification strategies

Arati Menon Carroll, ET BureauApr 24, 2009, 05.13am IST

Five years ago, Delhi-based construction company Unitechannounced it was making a foray into the malls and entertainment business. A Rs 500 crore company at the time, it chartered out a Rs 1500 crore investment plan to set up amusement parks and entertainment centres. The company clarified that "real estate business would remain its mainstay" , although it would diversify into related areas like hospitality and entertainment.

In 2007, having posted a fivefold rise in income to Rs 2,599 crore, Unitech announced its entry into a completely unrelated telecom business, saying investment in the segment would offer "vast prospective for adding up value to the group" . A year later however, Unitech Wireless had sold out a 60% stake to Norway's Telenor. With an accumulated debt of over Rs 8000 crore, Unitech has also begun the rapid sale of assets from hotel properties to school plots and even its two million sq ft Saket headquarters is on the block.

Logic At The Crossroads

Its chief competition, India's largest real estate developer DLF, is suffering from similar afflictions. If a year ago DLF was gung-ho about diversifying into renewable energy and infrastructure, these have now become millstones around its neck. Last month, it announced it was divesting its windmill power generation business, after having invested Rs 1500 crore.

The company is also believed to be selling some of its hotel plots across the country. When announcing the results of the December 2008 quarter, DLF vice-chairman Rajiv Singh had said the company aimed to raise around Rs 2,000 crore by selling "certain assets" .

It isn't just realty firms that are selling off non-core businesses . In December the RP Goenka group sold its stake in mobile and laptop retail chain RPG Cellucom to focus on "higher margin retail categories" . The metals-to-telecom Aditya Birla group is in negotiations to sell its electrical insulators business.

Air-conditioning and engineering firm Voltas recently announced the sale of its 50 year-old chemicals trading business, saying it didn't form part of its core. "We are definitely seeing an increase in the flow of sell outs," confirms Amit Chandra managing director at private equity firm Bain Capital India. Even planned investments are falling apart — the Hero Group has pulled out of its JV with Daimler to make commercial vehicles in India, to focus on its core business of motorcycles.

THE GO GO YEARS

During the bull run of 2000-2005 , amid increased global interest in the 'India story' and astonishing GDP growth, companies went on a high-octane drive of diversification beyond their central businesses. If in the days of the license raj it was the big business houses like the Tatas who could absorb the huge fixed costs of navigating the licensing system , the 21st century economic climate threw up business opportunities for all. "We mustn't forget that Indian entrepreneurship, in the post-reform , free market environment , is still a nascent phenomenon that is less than a few cycles old," says Chandra.

Some companies stayed focused: Infosys and Bharat Forge have been praised for their ability to stay invested in core operations. Others were lured by the high valuations in sunrise industries — like IT in the 90s, retail in 2000, and real estate and private equity recently. This kind of diversification is what Chris Zook, partner at Bain & Company and author of Profit from the core, describes as chasing the next "hot" topic.

While retail forms the core business activity of Kishore Biyani-led Future Group it expanded rapidly to consumer finance, insurance, leisure and logistics. Today however, its pockets aren't deep enough to support this. The Wadia group wanted to ride the airlines boom but Go Air has been in losses ever since. "While liquidity was easy," says Devinder Chawla, Partner, Advisory Services, Ernst & Young, "companies were extending themselves to what they believed were high-growth , highmargin businesses, even if completely unrelated."

Indiabulls, for instance, started life in 2000 as an online brokerage but furiously expanded into real estate, retail and power. In 2006, the company listed Indiabulls Real Estate and Securities independently from Indiabulls Financial Services (IBFSL), thereby unlocking value for each business . The market cap of Indiabulls leaped 19-fold to Rs 25,546 crore in four years after its Initial Public Offer in 2004; in the same period the benchmark Sensex rose threefold .

Last year, powered by a massive private equity infusion from L N Mittal and US-based fund Farallon Capital, Indiabulls Power Services was valued at Rs 5,525 crore. Gagan Banga, CEO of IBFSL, is candid in the face of detractors who accuse Indiabulls of playing the valuation game, "We don't think core vs. non core.